Would you want 40% of your wealth to be paid to HMRC on your death? Or would you prefer to pass assets down to your children or grandchildren, to help them on the property ladder, provide them with a top quality education, cover any medical costs or simply ensure that they are financially secure?
A continued growth in inheritance tax (IHT) receipts over the past decade have seen HMRC receive £6bn for the year to 31 March 2022 compared to £5.3bn the previous year.
At the same time, many opportunities to use family trusts to provide for descendants in a tax efficient way are overlooked.
Protected, secure, tax efficient. Family trusts are a great way to set aside significant assets for loved ones on your terms.
Every individual can generally set aside up to £325,000 into trust every seven years. However, there are lots of opportunities to set aside additional funds and below we look at some of the many ways that family trusts can be used to benefit children and grandchildren in a tax efficient way.
Trusts for business owners
Many people don’t realise that their business might qualify for 100% relief from IHT on their death. However, if that business is sold, the IHT rate goes from 0% to 40% overnight.
There is a significant, often one off, opportunity to put funds aside for future generations before the business is sold.
Case study 1 James and George were business partners who were selling their business.
James has three young adult children and wanted to set aside £5 million from the sale proceeds to help his children on the property ladder and provide for future generations.
George had a slightly smaller shareholding but wanted to set aside £1 million to help pay for his grandchildren’s education.
Both James and George set up trusts in advance of the business sale for these amounts, not limited by the usual £325,000 allowance. Assuming they are still alive in seven years’ time, they will save £2 million and £400,000 of IHT respectively, whilst ensuring funds are there to help their children and grandchildren when they need it most.
Protected, secure, tax efficient. Family trusts are a great way to set aside significant assets for loved ones on your terms.
Trusts for excess income
Another valuable exemption that is often overlooked is the ability to give away excess income on a regular basis. Unlike other gifts where you have to survive seven years, these gifts are immediately free of IHT.
Case study 2 Stephanie is a director of a FTSE 250 company and she has found that her earnings were outpacing her and her husband’s expenditure on their lifestyle. Year on year, their cash balances were increasing which Stephanie knew was simply increasing the value of their estate for IHT purposes.
Stephanie decided to set aside £100,000 a year into a trust for her children and grandchildren.
After 3 years, she had set aside £300,000 which, because it was from her excess income, was immediately outside of her estate for IHT purposes, saving £120,000 in IHT and with no seven year period to survive.
Trusts for school fees
With the rising costs of school fees, many grandparents want to do what they can to help their grandchildren get a great education, to give them the best opportunities in future.
Case study 3 Philip and Heather wanted to help their children with the payment of their grandchildren’s school fees. They had calculated that they would need to set aside £1 million to see their grandchildren through school.
Philip and Heather each set up a trust using their IHT nil rate band of £325,000 with the balance of £350,000 split between “bare trusts” for each grandchild. This provided protection should all funds not be used by age 18 whilst allowing Philip and Heather to give more than their IHT allowance, reducing their IHT bill by £400,000 if they both survive seven years.
Getting your wills right
Remember that with all of these trusts, you cannot have the funds back yourself once you have gifted them. It is therefore essential to ensure that the gifts are affordable.
For assets remaining in your estate, it is then crucial to ensure that you have appropriate wills in place. Have you thought about including trusts in your wills to provide protection for your family members, flexibility for changing circumstances, tax efficiency using available reliefs and privacy after you die? These benefits are often missed in “simple, straightforward wills”.
Ludlow Trust CompanyLudlow Trust Company is a Trust Corporation, which allows us as a corporate body to act as professional trustees. This means that when we are appointed, we will be on hand to deliver informed, personalised guidance at every step. To contact Ludlow Trust Company visit www.ludlowtrust.com or email them at enquiries@ludlowtrust.com
Illustration by Adi Kuznicki
